Jackson Trucking Company is in the process of setting its targetcapital structur

Question

Jackson Trucking Company is in the process of setting its targetcapital structure. The CFO believes the optimal debt ratio issomewhere between 20 and 50 percent, and her staff has compiled thefollowing projections for EPS and the stock price at various debtlevels:

DebtRatio                      ProjectedEPS                           Projected Stock Price
  20%                                   $3.20                    $35
  30                                         3.45                    36.50
  40                                         3.75                                                 36.25
   50                 3.50                  35.50

Assuming that the firm uses only debt and common equity, what isJackson's optimal capital structure? At what debt ratio is thecompany's WACC minimized?

Explanation / Answer

            TheIdeal Capital structure is approximately 40% of Debt and 60% ofEquity. Thus, Optimal Capital Structure of Jackson’sTrucking Company is 40:60.

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